Overview:

• Recent market volatility is largely equity specific – a mix of hefty valuations being impacted by rising bond yields and, somewhat separately, an unwind of leveraged “inverse volatility” products.
• The rise in global bond yields appears a durable trend, reflecting the ever-improving global growth outlook. It’s natural that the asset markets that benefited most from very low bond yields in recent years – and that is just about all assets – will need to adjust to this new reality.
• In Australia, the RBA left the cash rate at 1½% last week, a record 18^th consecutive month, and in a speech Governor Lowe said the Bank’s Board “does not see a strong case for a near-term adjustment in monetary policy”.
• The case for rate hikes will be stronger when the unemployment rate is at or below the “full employment” unemployment rate near 5% and wage growth is more
  clearly rising. NAB currently forecasts hikes from the second half of 2018 – forward indicators for employment and wages are positive but there is nonetheless a risk our forecast hikes are delayed.
• NAB expects Thursday’s December labour force report to show employment grew +35k (Consensus +15k) and the unemployment rate fell to 5.4% (Consensus 5.5%). For the reasons outlined above, the market is likely to focus closely on the track of the unemployment rate in coming months.
• The US CPI on Wednesday night is also an important release, given much of the recent equity market weakness ultimately sourced from concerns about US inflation, wages and Fed action.
• We’ll also be watching the NAB survey to see if the RBA’s increased confidence on the growth outlook continues to be mirrored in our survey (watch business conditions in particular) and importantly whether there is any progress on reducing spare capacity in the labour market (watch the capacity utilization rate, which is a good lead indicator) and returning inflation to the midpoint of the target band (watch the wages and prices indicators).

For further details, please see the attached report.

• Australian Markets Weekly: 12 February 2018 (PDF, 288kb)

For further FX, Interest rate and Commodities information visit nab.com.au/nabfinancialmarkets